ERF

Implications of the current low oil prices for MENA countries

The current low oil price environment, in part driven by the US shale oil revolution, has important macroeconomic implications for the Middle East and North Africa (MENA). This column reports research evidence on its likely impact on both oil-exporting and oil-importing countries in the region.

In a nutshell

In response to the fall in oil prices, energy exporters face a decline in economic activity, mainly because lower oil prices weaken domestic demand as well as external and fiscal balances.

There are also negative growth effects for energy importers that have strong economic ties with oil exporters.

For the MENA countries, the current low oil price environment provides an opportunity for further subsidy and structural reforms.

One of the consequences of the shale oil revolution in the United States is that US oil production can play a significant role in balancing global demand for oil and supply of oil. This in turn implies that the current low oil price environment could be persistent: once oil prices start to rise again above certain thresholds, production from US unconventional oil will accelerate, limiting any price spikes.

Our research analyses the impact of low oil prices on the global economy, particularly the countries of the MENA region. We show that the Gulf Cooperation Council (GCC) countries and Iran face a long-lasting fall in their real output (more than 2% over the long run) following a positive US oil supply shock as lower oil prices weaken their external and fiscal balances (see Figure 1). For Algeria, an OPEC member, the response is negative for the first 14 quarters before stabilising around zero over the long run, reflecting its strong trade linkages with Europe (a region that tends to benefit from low oil prices).

Given that oil exporters in the region (with the exception of Saudi Arabia) are producing at (or near) capacity, they cannot readily increase their production levels to compensate for lower oil prices (owing in part to the US oil supply revolution) and maintain the same level of oil revenues. Even if they were able to increase production, this would only lead to an increase in global oil supply, which would in turn depress prices even further, at least in the short run and until current projects from high-cost fields are completed.

What are the long-run growth effects of oil revenue shocks for major oil exporters? We find that real output for MENA oil exporters – Algeria, Iran, Kuwait, Libya, Oman, Qatar, Saudi Arabia and the United Arab Emirates – in the long run is shaped first, by oil revenue through its impact on capital accumulation, and second, by technological spillovers.

Oil revenue shocks have a large, long-lasting and significant impact on the growth paths of these economies, operating through the capital accumulation channel. Moreover, these countries will be adversely affected whenever oil revenues decline and will benefit whenever they rise. Therefore, macroeconomic and structural policies should be conducted in a way that the vulnerability of these countries to oil revenue disturbances (not just price disturbances) is reduced.

These results have strong policy implications. Oil exporters in the MENA region and beyond are faced with substantial losses in government revenues as a result of a seemingly long-lasting oil price fall. With buffers eroding over the medium term, most countries will need to reassess their medium-term spending plans. Improvements in the conduct of macroeconomic policies, better management of resource income volatility and export diversification can all have beneficial growth effects; as do policies that increase the return on investment, such as public infrastructure developments and measures to enhance human capital.

Moreover, the creation of commodity stabilisation funds – or sovereign wealth funds, in the case of countries in the Persian Gulf – might be one way to offset the negative effects of commodity booms and slumps (provided the low oil price environment does not last for a long time).

While it is no surprise that MENA oil exporters are affected negatively by lower oil prices, the overall long-term effect on output for MENA oil importers is not clear cut, considering the direct and indirect effects of lower oil prices for these economies. While a fall in oil prices initially implies lower import costs for these economies, it also reflects a slowdown in oil-exporting countries, which in turn negatively affects these economies through trade, remittances, grants and foreign direct investment channels.

Overall, Figure 1 shows that the direct positive effect of lower oil prices for all oil importers (except Egypt and Mauritania) is dominated by the indirect negative impact of spillovers from the exporters (in particular from the GCC).

More specifically, for most oil importers in the MENA region, gains from lower oil prices are offset by a decline in external demand/financing by oil exporters over the medium term given the strong linkages between the two groups. The likely long-run negative growth effects on these countries are not trivial but they are much smaller than those for oil exporters: roughly -0.5%, -0.7% and -0.2% for Jordan, Morocco and Tunisia, respectively.

For Egypt (despite having a relatively large subsidy bill) and Mauritania, responses are positive and about 0.2% in the medium term. In general, low pass-through from global oil prices to domestic fuel prices limits the impact on the disposable incomes of consumers and the profit margins of firms in MENA oil importers, and thereby reduces the direct positive impact on economic growth in these countries.

The sensitivity of MENA countries – both oil exporters and importers – to oil market developments raises the question of which policies and institutions are needed in response to such shocks. While countercyclical fiscal policies are key to insulate the exporters from commodity price fluctuations, the other priority for commodity exporters should be to enhance their macroeconomic policy frameworks and institutions.

Oil importers in the region should not overestimate the positive impact of the decline in oil prices on their economies given considerable uncertainty about the persistence of lower oil prices and the availability of external financing and weak demand growth in oil-exporting trade partners. For the MENA countries, the current low oil price environment provides an opportunity for further subsidy and structural reforms.

Most read

Today’s rulers of the three largest Middle Eastern economies all look to religious authorities as a key source of legitimacy. Drawing on a broad sweep of historical analysis, this column explores what this might mean for the region’s economic future. One notable danger is that the types of people who would push for policies that promote long-run growth are excluded from the political bargaining table.

Following a period of rapid economic growth, the Turkish economy has slowed significantly since 2007. This column argues that these economic ups and downs reflect institutional improvements in the aftermath of the country’s 2001 financial crisis, followed by an ominous slide in the quality of these economic and political institutions.

The current low oil price environment, in part driven by the US shale oil revolution, has important macroeconomic implications for the Middle East and North Africa (MENA). This column reports research evidence on its likely impact on both oil-exporting and oil-importing countries in the region.

What are the prospects for democracy in the Arab world? This column expresses the hope that as conflict-afflicted countries embark on their programmes of economic reconstruction, autocratic institutions will not be re-established under the pretext of the need for a speedy and steady recovery. The optimal path of development necessarily includes robust growth, equity as well as democracy.

What can be done to reduce income inequality in Arab countries? This column explores issues of measurement as well as potential policy measures. It concludes by calling for a new multipurpose pan-Arab survey that would allow for an evidence-based decision-making process on the impact of proposed policies on poverty and inequality.

As energy-producing economies strive to reduce their reliance on oil revenues, they must strike a balance between the competing demands of fiscal sustainability and steady growth of the non-energy sector. This column outlines how the United Arab Emirates is addressing this challenge.

The Middle East was once the cradle of civilisation: can it prosper once again? Looking back at lessons from the European Enlightenment, this column argues that if the region wants to advance economically, it needs to advance in terms of its treatment of women. Female agency is central to understanding the West’s technological leadership of the past two centuries.

Attainment of higher education is strikingly unequal in Egypt and Tunisia, and a little less so in Jordan. This column reports research showing that in all three countries, family background is the primary driver of inequality. Particularly in Egypt and Tunisia, public spending on higher education is regressive, with the result that what purports to be a meritocratic and equitable system in reality perpetuates inequality.

What are the implications of low oil prices for the economic and political stability of Arab oil-exporting countries such as Saudi Arabia? This column explores the impact of the US fracking boom on Arab oil revenues – and how policy-makers in these countries should respond.

To tackle the deficits in their pension systems, should governments in Arab countries raise social security contributions, reduce pension levels or increase the statutory retirement age? This column summarises the results of research assessing the costs and benefits of different pension reforms in terms of their impact on different generations and on the labour market.